Deal drama continues to envelop Qualcomm Inc. (QCOM) , as former Executive Chairman Paul Jacobs explores taking the mobile chip maker private.
The San Diego chip maker said late Friday that it would not re-nominate Jacobs, the son of Qualcomm co-founder Irwin Jacobs, after he notified Qualcomm that he might attempt to buy the company.
Shares of Qualcomm gained 0.8% to $61.28 after hours on Friday, but were trading down 0.5% early Monday. The Financial Times reported earlier that Jacobs had approached investors including Masayoshi Son's Softbank Corp (SFTBY) .
While the bid would take Qualcomm out of the public markets and remove the possibility of another hostile bid, the San Diego company is not an ideal candidate for a leveraged buyout.
For starters, Jacobs' group would have to include a big equity check, Moody's Investors Service analyst Richard Lane said. The equity portion of the acquisition would fall between $20 billion to $30 billion, he suggested.
While Son and Softbank, which controls the Vision Fund, have tremendous resources, a sale involving a Japanese backer would trigger a review by the Committee on Foreign Investment in the U.S. (Cfius). A leveraged buyout would concern the group, based on Cfius's previous comments on Broadcom's proposed acquisition of Qualcomm.
"Cfius has said it was concerned that Qualcomm may be run in a private equity-style under Broadcom -- an LBO scenario would be very similar," Lane said.
Broadcom's last bid for Qualcomm valued the company at $82 per share, or $143 billion to $149 billion, including estimated debt from Qualcomm's planned purchase of NXP Semiconductors NV (NXPI) .
Jacobs stepped down as Qualcomm's executive chairman on March 9, with former Cardinal Health Inc. (CAH) , Eli Lilly and Co. (LLY) and General Motors Co. (GM) executive Jeffrey Henderson replacing him as non-executive chairman. Qualcomm said the move reflected its commitment to improving corporate governance, ahead of a showdown at its annual meeting with Broadcom.
Eli Lilly is an Action Alerts Plus holding.
Since Qualcomm and Jacobs had argued that the $82 per share bid materially undervalued the company, RBC Capital Markets Amit Daryanani suggested in a report that the offer would likely have to be $90 or higher. That would put the enterprise valuation, including debt, at more than $160 billion and likely require more than $30 billion in equity, RBC projects.
At about $90 per share, the investors could generate a 20% to 30% internal rate of return, Daryanani calculated, if Qualcomm hits operational targets and the sponsors could exit at a valuation of around 12 times Ebitda. However, the analyst wrote that the valuation, Cfius's concerns and the potential disruption to Qualcomm's negotiations with Action Alerts Plus holding Apple Inc. (AAPL) and Huawei Technologies Co. Ltd. make an LBO unlikely.
Likewise, Angelo Zino of CFRA Research gave Jacobs long-shot odds. "Given the sheer size, needed investors and Paul Jacobs's less than 1% stake in [Qualcomm], we see a successful takeout as unrealistic and unlikely," he wrote.
Qualcomm's debt levels have already prompted Moody's and Standard & Poor's to raise red flags. The ratings agencies each placed a negative outlook on Qualcomm in February after the company raised its NXP Semiconductors NV to $127.50 cash per share from $110.00.
Representatives of Qualcomm and Broadcom could not immediately be reached Friday.
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